Netflix’s cost of adding new subscribers on its home soil in the US has rocketed in recent years, reaching $100 (€86) per net new subscriber, according to Ampere Analysis. Acquisition costs for domestic subscribers have increased significantly in recent years; from 2013-2015 the cost of a net new domestic subscriber stood at a stable figure of around $60.
In contrast, Netflix’s cost of adding international subscribers has remained relatively flat at $40-$45 for each new customer it adds. So, while headlines about content spend dominate, this report focuses on Netflix’s significant investment in marketing.
The facts: Netflix’s marketing spend
1. Netflix’s domestic marketing spend has risen significantly both in absolute and relative terms. In 2014-2015 Netflix spent 0.3 billion per year compared to $0.6 billion in 2017
2. Domestic additions are beginning to slow as Netflix saturates its home market meaning that each marketing dollar corresponds to an ever-decreasing number of new subscribers
3. 14 per cent of Netflix’s expenditure is on marketing related costs
4. In 2017, Netflix spent close to $1.3 billion on advertising its streaming products. This spend was split roughly equally between its domestic and international markets
5. Marketing spend has increased significantly in recent years. Global expansion certainly accounts for some of that growth, but the question is whether that increase is proportionate. In 2016 Netflix spent just under $1 billion on global marketing and five years ago the company was spending around $0.5 billion
6. Rising marketing spend combined with falling subscriber growth mean than it takes Netflix 11 months to achieve payback on net new domestic customers. In comparison, international subscribers cover their marketing costs within four months
7. Ampere Analysis believes that if international markets follow the same trajectory as the US, with increasing levels of marketing required to drive a steady rate of new customers, subscriber acquisition costs could rise to approaching one fifth of Netflix’s total costs.
8. Netflix does not publish churn rates, but Ampere’s research indicates that between 20 per cent-25 per cent of US Netflix subscribers have a high intention of churning in a six-month period. Benchmarks for other companies show that roughly half of consumers follow through, indicating an annual churn rate of 20 per cent. Each 10 per cent of annual subscriber churn currently adds an extra month to the payback period, so Netflix will need to manage its domestic marketing budget carefully to tackle churn and drive additions.
9. This lengthening payback period – coupled with ever-rising content costs – goes a long way to explaining Netflix’s recent testing of a new premium price tier, which will help the streaming giant offset its rising cost base.
Richard Broughton, Research Director at Ampere Analysis, says: “With declining domestic growth rates and spiralling acquisition costs, Netflix faces a very real set of challenges if it is to continue to command such a strong position. Our research show that while Netflix can continue to enjoy relatively low acquisition costs for international subscribers and a buoyant market keen to embrace SVoD, it cannot afford to take its eye off the ball in the domestic market, even momentarily. Its ability to grow ARPU will be critically important to manage long term growth – domestically and abroad.”